A week, they say, is a long time in politics. Well, the same could be said about three months in the airline world.
When Airline Business sat down with Steve Ridgway last October, all we knew for certain was that he was preparing to pass the reins to – at that time – an unnamed successor who would have a lot on their hands. Within 90 days of Ridgway’s November 2012 Airline Business cover interview, Virgin had undergone a US invasion in the form of eager new shareholder Delta Air Lines, and former American Airlines executive Craig Kreeger taking the helm.
The UK airline also got the nod to launch domestic services (under the “Little Red” brand) through the award of remedy slots at London Heathrow released by British Airways as a condition of its acquisition of BMI. One thing that didn’t change during those three months was the airline’s loss-making status, and one of Kreeger’s first tasks after joining was to confirm more red ink, with Virgin returning a pre-tax loss of £69.9 million ($106.7 million) for its 2012-2013 fiscal year (to the end of February). His number one priority is to reverse that loss-making status within two years.
With such fundamental changes going on both inside and out, Virgin Atlantic is gearing up for potentially the biggest transformation in its almost 30-year history. With that in mind, Airline Business broke with tradition and conducted two cover interviews with consecutive chief executives less than a year apart.
Kreeger has a clear view of how the airline must be transformed from a loss-making operation to one fit for long-term survival, without losing the trailblazing image it is so famous for. And despite this invasion of “suits” from legacy network carriers across the pond and the focus on profitability, Kreeger tells Airline Business that Virgin Atlantic will not lose sight of its core values “to remain bright red, customer-focused and innovative”.
Having served American in a number of executive roles for almost three decades, Kreeger is having to quickly adapt to a world which is slightly different to the one he left behind in Texas: “I used to wear a tie if need be, but not as a matter of preference,” he jokes, and he suggests the cultural differences between Virgin and the US carriers are not a stark as some might think.
He may project a relaxed attitude outwardly, but Kreeger has already taken some tough decisions on the airline’s management structure. These followed the departure of Virgin’s chief commercial officer – and rival for the top job – Julie Southern.
“After Julie chose to move on, I took that opportunity to look at the organisation, and decided to flatten it. I’ve eliminated one layer to help me be closer to our people who deliver customer service, and ultimately be closer to our customers. It will give me better insight into the company and hopefully help streamline how we do things.”
Kreeger has effectively eliminated the executive director layer and reduced the total number of senior positions in the company “to gain some efficiency and make the organisation a little flatter”. This has resulted in “a couple of other exits” within the management team, he adds, one of which is COO Steve Griffiths.
The immediate task is to return the Virgin Atlantic business to profit, and Kreeger has a clear plan to make this a reality during its next full fiscal year, ending February 2015.
“My objective – and what my success will be measured by – is to stabilise the financial side of the business while retaining the magic that is what our company is. My job with Virgin Atlantic is to take that brand and try and take advantage of the things that we are doing to address the shortfalls we have financially,” he says.
Kreeger is confident he can complete his mission, because he says Virgin has been affected disproportionately by several issues that have caused its financial woes over the last five years.
“Fuel prices impact all the airlines, but I suspect we are the only one who could have said three years ago that every one of our aircraft are four-engined. We didn’t have the right fleet for a rising fuel price environment, so [high] fuel prices have hit us harder.”
Virgin is in the midst of a roll-over which will see its fleet of 19 four-engined Airbus A340s replaced by more efficient twinjets. Ten A330s have been introduced over the last three years, while the first of 16 Boeing 787-9s arrive from September next year.
“We’ve taken out a total of six A340s over the last 12 months, and the fleet will be replaced [entirely] by the 787s, and the remainder should all be gone by 2017-2018,” he says.
So within five years the vast majority of the Virgin fleet will be twins, “and that by itself remedies a lot of the company’s financial difficulty”, says Kreeger.
PUTTING EGGS IN SEVERAL BASKETS
The “second big thing” that has blighted Virgin is its disproportionate reliance on one economy, he says. “More so than British Airways even, we generate a high percentage of our revenue in the UK.
“When I look at how Virgin is going to compete in the long run effectively, creating stronger revenue generating capability in the USA is one of the things that will help us be successful in competing for customers,” Kreeger says.
Virgin Atlantic’s commercial tie-up with Delta, which is being implemented as part of the US carrier’s December 2012 acquisition of a 49% stake from Singapore Airlines, provides the solution for this conundrum. In July Virgin and Delta launched a major codeshare and frequent flyer programme tie-up as the first step in a commercial partnership which should see a metal-neutral transatlantic joint venture implemented early next year, once anti-trust approval is received.
“BA has been able to achieve a bigger footprint in the USA through its relationship with American Airlines. We believe that our relationship with Delta, which will encourage its frequent travellers, corporate accounts and travel agency partners to utilise our aircraft [can do the same].
“Delta’s distribution in the USA and our product and service will be a hugely winning combination – we think it will take a lot of customers off our competitors and move them on to us. That will remedy one of our other shortfalls, which has been a reliance on what has been, for the last five years, a pretty weak economy,” Kreeger says.
Kreeger expects the Delta tie-up will also boost its UK earning thanks to the 40 or so additional destinations it will offer beyond its US gateways, by connecting on to Delta domestic flights.
“We’ve struggled with a lack of connectivity in our network, [compared with] British Airways. We’ve begun to offer a lot more connections with Little Red, as well as on our Delhi and Mumbai flights, which are timed to connect with the US flights,” he says.
TIME WILL TELL
Little Red launched in March, flying between Heathrow and Aberdeen, Edinburgh and Manchester, with four A320s operating on wet lease from Aer Lingus, which provides the flight and cabin crew.
The primary function is to feed Virgin’s long-haul services, and was implemented to overcome the demise of BMI, following its take-over by BA last year. Although the new service is in its very early days, Kreeger is coy about its performance so far: “When we measure success on Little Red it’s looking at the total incremental value it creates, both on the short-haul and on the long-haul that the short-haul brings to us. In that sense, it’s on track and building – it’s in the start-up phase – and we’re comfortable where we’re headed,” he says. “The key thing for us is the flow customers, and we’re seeing that build. It’s on the path we anticipated.”
Kreeger declines, on competitive grounds, to specify the split on the Little Red routes between point-to-point and connecting passengers. He also refuses to say how long Virgin will give the short-haul operation: “I anticipate it working so I don’t have to give a date,” he says.
When we spoke to Ridgway last year, he proudly pointed out that “there’s not really another Virgin Atlantic anywhere in the world” – ie a major airline predominantly serving long-haul destinations against a powerful local competitor. But can such a business be sustainable in the long-term?
Yes, says Kreeger: “The [Virgin Atlantic] brand is about being different and creative, and what makes us a viable long-term competitor is that we bring that to a marketplace that can use it and values it.
“We have to be big enough, fly to the right cities and offer a network – including our partners – that creates connections and gives enough scope and scale so that people can choose us with some regularity.”
Kreeger sees the Virgin brand as a key draw for Delta’s stake-holding deal: “I think it was [attracted by] a blend of access to Heathrow and a service culture that will allow us to compete effectively for business from the other alliances.
“Delta views that [reputation for good customer service] as a competitive opportunity. It sees that if it can put its customers on to our airplanes and given them those experiences, then it will enhance its ability to sell in the USA.”
Heathrow has been a bit of a “white space” on Delta’s network, says Kreeger. It only entered Heathrow five years ago and serves five US points: Atlanta, Boston, Detroit, Minneapolis and New York JFK. Virgin provides it with “much more depth in the most important market – New York”.
If the strength of Virgin Atlantic’s image was such an important deal maker, then it would seem to cast strong doubt over the assurances made by rival airline boss Willie Walsh that Delta’s end-game is to eliminate the Virgin brand.
“I fully recognise that one of my primary objectives is to protect Richard’s privates – and I will achieve it,” jokes Kreeger, in reference to Walsh’s “knee in the groin” threat to Branson over the Virgin brand last year.
Branson, of course, retains his 51% controlling stake in Virgin Atlantic. Although the airline is one of the British entrepreneur’s many businesses, he famously keeps a firm hand in its affairs, as the carrier is probably his favourite child. But Kreeger doesn’t envisage that his boss’s attention will get in the way: “I speak to him regularly. Richard is very interested in this business but I feel I have the flexibility to do what I need to do. And for me, as a new CEO, he’s a very helpful guy to have around.”
There has been speculation around the sale of some or all of Branson’s stake to give Delta – or a group comprising Delta – a controlling interest, but Kreeger does not envisage such a development in the near term: “Everything I’ve seen when chatting with Richard is that he’s right now very happy with his stake and intends to continue with it. So I don’t see [other investors coming in] as a likely next step in the process.
“My belief is that when we manage to turn this into a profitable company, Richard will be extremely happy with that 51% stake and that it’s generating the kind of returns [it should be].”
From a fleet perspective, beyond the A340 roll-over a longer-term priority is to devise a succession plan for its 747-400s, which may or may not include the A380.
Virgin’s 12 747-400s were recently refurbished “so that fleet has quite some time to run”, says Kreeger. “We’re starting to think about replacing that aircraft, with deliveries from around 2018-2019 into the 2020s. That will be the next fleet decision for us.”
The status of the airline’s order for six A380s, originally placed in 2001, is less clear: “We’ve deferred the A380 deliveries and at some point we’ll have to take a decision ultimately whether to take them or not. As we sit here today, we don’t have any definitive plans to take them.”
Almost since the day Virgin launched in 1984, its relationship with its UK rival has been an acrimonious one – and ended up in court on occasion. But with Kreeger being a long-serving executive with BA’s alliance partner American – where he spent six years in the UK as SVP international from 2004 – perhaps there could be a thawing in that frosty relationship. Or perhaps not.
“We’re always going to be intense competitors. I obviously have a historical good relationship with a number of folks at BA, but the nature of our jobs is such that it’s always going to be that way,” Kreeger says.
And despite such long service with one of Virgin’s major competitors, he seems genuinely excited to be fighting for the other side now. “When I think of Virgin Atlantic, I think of two things: welcoming and cool. I’ve always been impressed with the way it has punched above its weight and looked after customers, and I’m thrilled to be part of it.”
Kreeger’s challenge then, is to make Virgin profitable – and stay cool while he does it.